problem:
When you change the permalink in settings general, page can not be found.

this has nothing to do with the theme, the permalink option is part of WordPress.
does it create an .htaccess file on our server (you will need to check it with an ftp program)
your host might be blocking you from doing that.
temporally swap to the twenty-eleven theme and try the same thing

Thanks a lot, yuggledad!
Appreciate your feedback! I'm a big fan of Atahualpa. Moderator of the forums WordPress directed me to ask here.

what happens if you swap to the twenty-eleven theme and try the same thing